Gold stayed under pressure this month. And the third quarter is shaping up
to be a negative one. So what's going on?
This past month, we've seen the U.S. economy improve, which has kept investors
running to the stock market.
It's also fueling beliefs that higher U.S. interest rates are coming sooner
than expected. This has been pushing up the U.S. dollar. And with Europe also
needing to continue their stimulus and keep interest rates low, it's adding
even more fuel to the stronger dollar. That in turn is keeping downward pressure
on gold. And it's causing a decline in the demand for gold.
Global tensions kept gold from falling more. And as you can see on Chart
1, the dollar index has risen more than gold has declined.
Nevertheless, money managers are trimming their bullish gold positions: Open
interest in NY futures and options is near its lowest in 5 years.
Uncertainties are abundant
But with so many uncertainties in the world today, we could see the markets
turn on a dime.
Yellen continues to reiterate that lower rates are here to stay until we see
better jobs figures. She insists there is still slack in the labor market.
Plus, considering the faltering world economy, global tensions, the monster
debt problem and unprecedented liquidity..... anything is possible. The U.S.
bombing in Syria is just the latest example.
All this means is we have to be prepared for change, and go with it when it
happens.
This is why we place importance on our charts. They help to see changes or
subtleties upcoming. They also tell you when to stay with a trend.
Many have compared gold's current three year bear market with several major
declines of the past.
The bear market of the 1980s-90s was the worst one. Its loss was not so much
of a price loss than it was in the seemingly forever lackluster market.
Notice the comparison between the last three years since the September 2011
peak to the start of the major bear market in 1980 (see Chart 2). As
you can see, the loss is less today but the movement is similar.
The point here is, will gold soon resume a bull market in the upcoming years,
or will it be similar to that lackluster period when gold essentially moved
into a sideways band? Back then, gold stayed near or above the June 1982 lows
with a cap at $500 for more than another decade.
We think this is unlikely in today's world, but it's always good to play devil's
advocate.
For now, the December lows will tell the story and that's what we're watching.
If gold can stay above $1193, the December low, it'll continue building a
huge bottom, which will likely be a springboard for higher prices.
If the December lows are broken, however, it'll be a very bearish sign.
